Eastern Europe

Downturn May Spur EU Budget Reform


Thank God the Irish voted down the Treaty of Lisbon.

So tangled can European Union politics be that even some of the more federally minded chancelleries of Europe are surely thinking this as they survey the destruction the recession is wreaking on the Continent's political economy.

In these thoroughly dramatic times few remember the hysteria surrounding the negotiations for the EU's 2007-2013 budget. Always difficult, these were so tortuous that some commentators were predicting the union would sink into irrelevance or might even split if no agreement were found.

Agreement was duly negotiated with the proviso, demanded mainly by the United Kingdom, Sweden, and the Netherlands—the hard core of a band of fiscal conservatives in the European Council—that the entire system be reviewed in 2008-2009. Their aim was to reduce expenditure on the common agricultural policy, slammed by some as the most wasteful farm subsidy scheme in the rich world, and reorient most of the development spending to the new member states.

That is where the Irish "no" comes in.

In mortal fear of the island state that is holding the entire EU and its constitutional development hostage, Brussels is skirting the matter. The European Commission was due to make its proposal for the review of the EU's financing early this year. Wary of upsetting people before the ratification of the Lisbon Treaty is finally concluded, the review was delayed until at least the end of this year.

This is wise politics. It is not clear that the effort would have gone anywhere, anyway. Most beneficiary states, including most of the eastern and southern members, were saying back in 2005 that any review could take effect only in the next seven-year financing period, from 2014.

Diplomats in Brussels tell me that while British, Swedish, and Dutch diplomats are still talking about the review, most people are quite happy to let it sink. It is now unlikely that there would be a proposal before early next year, which means there is really no point doing it at all. The preparations for the next financing period would have to start soon, anyway.

CAP AND SPEND

The point of all this is that the delay is a godsend for those countries, like most Central and Eastern European members, who make a lot of money out of the EU budget. The deterioration of public finances driven by the economic crisis is so severe in Europe, not least in those states that finance the EU, that the community budget might be in for a drastic overhaul. The later this comes the better, they might be thinking, because in a couple of years the economy will pick up and there might be more money again to blow on things like the common agricultural policy.

But there might not be. According to the International Monetary Fund, the eurozone's overall budget deficit will rise to 6 percent next year from 5.5 percent this year, double the limit set by the EU treaties. The eurozone's four biggest economies will have deficits ranging from 6 percent to 11 percent in 2010. Eleven of the 16 eurozone states will have debt-to-GDP ratios of more than 60 percent, the treaty limit.

Those are ugly numbers by any measure. They are even more alarming because out-of-control budget deficits are the single biggest threat to the eurozone's stability. The deficits must be trimmed.

That means that people are going to have to choose, which in turn may or may not lead to a real reform of the EU's stone-age budget: about 80 percent still goes to agriculture and development support that is splashed across most of the union, poor states and rich alike, without sensible priorities.

Disagreements within the group of fiscal conservatives meant last time around that their insistence that the EU budget stay under 1 percent of members' combined GDP (the magic number for hawks) did not lead to budgetary reform. Instead, it conserved all the bad elements of the budget because nobody was willing to give up the huge aid packages.

Most of the forward-looking economic reform initiatives were, however, eliminated, blowing another hole in the already-tattered "Lisbon strategy," the EU' s grand economic modernization package launched in 2000. A combination of fiscal conservatism and sheer give-me-money selfishness nearly killed off even hugely successful and popular programs like the Erasmus student exchange system, a legitimate and useful cross-border initiative if ever there was one.

Last time around the easterners were mostly for conserving the regional development and agriculture support payments. Understandably, they wanted to milk the EU. Next time it may be a bit different. Successful little economies like Slovakia and the Czech Republic may become net payers into the budget, causing them to look at things through different eyes. Slovenia is already there, and the Slovenes now also have a strong stake in the stability of the euro.

Slower movers, like Poland and Hungary, are going to have to be clever. Almost certainly, there is going to be less money. The huge redistributionist programs might be trimmed, perhaps seriously. Only a fool would suggest that these countries should give them up – there is too much money in them. But they will have to make a clear choice if they want to preserve some of their benefits. Stubbornly protecting the money pot will not work. And for those who believe in revamping what is a hugely inefficient and not very clever EU budget, that may be no bad thing, anyway. Setting real priorities for regional development spending, half of which is still geared toward the rich western members, might be a good place to start.

Provided by Transitions Online—Intelligent Eastern Europe

Balint Szlanko is a former Brussels correspondent, now based in London.

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